波士頓物產 (BXP) 2018 Q2 法說會逐字稿

Good morning, and welcome to Boston Properties Second Quarter Earnings Call. This call is being recorded. (Operator Instructions) At this time, I'd like to turn the conference over to Ms. Sara Buda, Vice President of Investor Relations for Boston Properties. Please go ahead.

Thank you. Good morning, and welcome to Boston Properties Second Quarter Earnings Conference Call. The press release and supplemental package were distributed last night as well as furnished on Form 8-K. In the supplemental package, the company has reconciled all non-GAAP financial measures and the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive a copy, these documents are available in the Investor Relations section of our website at www.bostonproperties.com. An audio webcast of this call will be available for 12 months in the Investor Relations section of our website.

At this time, we would like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although Boston Properties believes that expectations reflected in any forward-looking statements are based on reasonable assumptions, it cannot give -- it can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements were detailed in Tuesday's press release and from time-to-time in the company's filings with the SEC. The company does not undertake a duty to update any forward-looking statements. Having said that, I'd like to welcome Owen Thomas, Chief Executive Officer; Doug Linde, President; and Mike LaBelle, Chief Financial Officer to the call. During the question-and-answer portion of our call, Ray Ritchey, Senior Executive Vice President, and our regional management teams will also be available to address any questions. And now I'd like to turn the call over to Owen Thomas for his formal remarks.

Thank you, Sara, and welcome to Boston Properties. Sara joined us last week as Vice President and Head of Investor Relations and comes with a wealth of experience in the field. We are delighted that you are here.

Good morning, everyone. The second quarter marked another strong period of wins and leasing and new investments, and we continue to complete major steps towards achieving our growth goals.

In this last quarter, we generated FFO per share, which is $0.04 above our guidance, $0.02 above Street consensus and increased the midpoint of our full year 2018 FFO guidance by $0.07. We leased 1.7 million square feet, which is well above our long-term quarterly average for the period. This brings us to almost 4 million square feet leased in the first half of the year, and we achieved several important leasing wins on key in-service assets, which Doug will review.

And just this past July, we secured Verizon as anchor tenant to develop a 627,000 square-foot office tower in Boston as the last phase of our Hub on Causeway project with Delaware North. We closed the acquisition of Santa Monica Business Park in West L.A. with CPPIB as a capital partner, and we closed a joint venture with the Moinian Group for the future development of 3 Hudson Boulevard, a large-scale office property in the Hudson Yards.

So overall, Q2 was a strong quarter for Boston Properties with activity in leasing, development and acquisitions continuing in July. We continue to experience a positive environment for commercial real estate including high-quality office assets in gateway cities, which is our focus, with several economic and market tailwinds.

First, overall economic conditions continue to be quite favorable and have, if anything, improved since last quarter. Though impacted by timing of new trade tariffs, second-quarter U.S. GDP growth was 4.1% and is projected to be 2.8% for all of 2018. Job creation remained steady with 630,000 jobs created in the second quarter and the unemployment rate stable at 4%. Though the prospect of trade wars and political turmoil is unsettling, an economic downturn does not seem imminent to us.

On capital markets, though the Fed increased rates 25 basis points in June and is signaling additional increases in 2018, the 10-year treasury rate, actually as of this morning, is trading roughly flat to the level that it traded on our last earnings call.

Obviously, the yield curve is flattening given low inflation in global market forces, we don't see significant long-term interest rate increases as a major risk factor to our business at this time. Given this economic backdrop and the fact that the supply and demand of office space remain in general equilibrium, leasing activity is healthy across most of our geographic markets and with customers in numerous industries.

In the private real estate market, transaction volume growth has turned positive. Specifically, U.S. large asset transaction volume in the second quarter increased 9% from the first quarter and 15% over the second quarter of '17.

Office represented 31% of the transaction volume for the quarter and increased 4% from the first quarter of 2018. Investor appetite and as a result cap rates remain healthy in our core markets. There were once again, numerous significant asset transactions this quarter with cap rates in the 4s and prices per square foot above replacement cost.

Starting in Boston, Pier 4 in the Seaport is selling for a low 4s cap rate and just under $1,200 a foot to a domestic pension adviser. This building is 370,000 square feet and 93% leased.

In New York, a 20% interest in 10 Hudson Yards sold to a domestic pension fund at a 4% cap rate and just over $1,200 a foot. The building is new, comprises a 1,000,008 square feet and is fully leased.

In San Francisco, 345 Brannan in the SoMa District is under agreement to sell for a San Francisco record price of $1,326 a square foot and a 5 cap rate to a REIT. The property is a 110,000 feet and is 100% leased to Dropbox.

And finally, in Washington, D.C., 2099 Pennsylvania Avenue located across the street from our future development at 2100 Pennsylvania Avenue, is under agreement to sell for $1,054 a square foot and a 4% cap rate to a domestic pension adviser. This building is a little over 200,000 feet and is 98% leased.

Moving to Boston Properties capital activities, we're having an active year selling non-core assets and will likely exceed our $300 million disposition target this year. We recently closed the sale of 91 Hartwell Avenue in Lexington mass for $22 million. With this sale, we've completed nearly $150 million in dispositions year-to-date. We are marketing for sale 1333 New Hampshire Avenue located near Dupont Circle in Washington, D.C. This 320,000 square-foot property will be fully vacated by Akin Gump in 2019. We are executing many new developments in D.C. and the lighter renovation of this asset justified by market conditions is not a good fit with our ongoing strategy.

We are considering recapitalization options for our 634,000 square-foot build-to-suit for the TSA in Springfield, Virginia, in order to free up capital for our growing development pipeline. If completed, we will refund our invested capital to date, avoid future development draws and generate development fees as well as a return on our invested capital, and we continue to explore additional sales of select non-core assets throughout the portfolio.

Moving to acquisitions. Last week, we announced the closing of our Santa Monica Business Park acquisition in L.A. We did enter into a joint venture with Canada Pension Plan Investment Board, who will own 45% of the project and the venture completed $300 million of acquisition financing. Boston Properties' resultant equity investment in the property is approximately $180 million.

On returns, our initial unleveraged cash yield is nearly 4% and is expected to be over 6% in 5 years due to market roll-ups and must take space from Snap, a major tenant. Most of the property is encumbered by ground lease with an above-market coupon and a market purchase option in 10 years. The coupon on the ground rent is above the stabilized cash yield of the asset, so the future purchase of the land will be accretive to annual returns. We are excited and honored to form this first partnership with CPPIB, which both of us hope and expect will lead to future joint investments. We're also very pleased with our increased presence in the Los Angeles market, which doubled with this deal, and our critical mass in Santa Monica. Development continues to be our primary strategy for creating value. We remain very active pursuing both new preleased projects and sites for future projects.

Specifically, we announced last week, the Boston Properties has entered into a partnership with the Moinian Group to purchase a 25% stake in 3 Hudson Boulevard, one of the most attractive large tenant sites in New York City. The site supports a $2 million square-foot office building and is located adjacent to the nearly completed 7 train entrance. Boston Properties will assume operational control of the co-development and construction of the foundation for the tower is already underway. We were able to acquire the site at an attractive price and minimize our capital outlay. We invested $46 million at closing and have a commitment to fund an additional $62 million in the future if capital is needed by the venture. We believe the purchase price for the land approximates $360 per FAR square foot and significantly less on a rentable square-foot basis. When you factor in the initial FAR purchase, option prices for the remaining FAR and funding to date on the foundations and below grade base building components. We also provided $80 million of financing to replace an existing land loan. Our focus now is securing a significant anchor tenant, which is a precondition of commencing vertical construction. With the closing of 3 Hudson Boulevard -- with the 3 Hudson Boulevard joint venture and our previously described development at 343 Madison Avenue, we now have 2 major sites in New York for future growth. Continuing the theme of conserving our public equity capital, we are also working towards bringing in a capital partner for the project at 343 Madison Avenue, currently in the pre-development phase.

In Boston, we announced yesterday that we executed a lease agreement with Verizon communications for approximately 440,000 square feet to anchor 100 Causeway, a 627,000 square-foot, 31-story office tower. This is the last phase of The Hub on Causeway, our $1.4 million square-foot multiphase development located adjacent to North Station in the TD Garden. The first 2 phases of the project are underway and include a hotel and residential tower on top of a mixed-use podium. We are developing the site as part of 50-50 joint venture with Delaware North, 100 Causeway is 70% preleased, and we are in tenant discussions to lease the balance of the building. Our future invested capital is estimated to be $260 million and projected initial cash yields are consistent with our development hurdles approaching 7%.

Also in Boston, we are in discussions with an existing tenant at Kendall Center to redevelop an office property for their expansion. And lastly, this quarter in Reston, we delivered into service our 508 unit signature residential project, which is in the early phases of lease-up. Our current development and redevelopment pipeline stands at 13 office and residential projects comprising 6 million square feet and $3.3 billion of investment for our share. Most of the pipeline is well underway, and we have $1.1 billion remaining to fund. The commercial component of this portfolio is 83% preleased and aggregate projected cash yields approximate 7%. These figures exclude the $1.4 billion in new developments we have described in this and previous calls, where we had anchor lease commitments but have not commenced the project, including 2100 Pennsylvania Avenue, Reston Gateway and 100 Causeway. These projects will all commence in 2018 and '19.

Our capital strategy remains unchanged. Our best use of capital today is launching new preleased development and making select value-add acquisitions for which the yields are higher than both stabilized property acquisitions and the inferred cap rate in repurchasing our shares, notwithstanding their material discount to NAV. Our best and cheapest source of capital is debt financing, which we can utilize without materially changing our credit profile due to the new debt capacity provided by the income from our development deliveries. We have and will continue to select non-core assets, which raises marginal capital, the sale of larger core assets is a less efficient funding source given significant embedded tax gains and result in special dividend requirements. We can accomplish our growth plan without accessing public equity capital, given the debt capacity and deliver developments, and if needed, access to plentiful private equity capital.

This has been another significant quarter of wins for Boston Properties, both in the new investments I described and in leasing, which Doug is about to discuss. Our outlook and future growth plan continue to be strong and viable. We remain confident with our plan to material -- materially increase our NOI starting in 2019 through development deliveries and leasing up our existing assets from approximately 90% to 93%. And continuing growth in 2020 and 2021 is now becoming more clear and likely, given all the new developments we've added and expect to add to our pipeline. Let me turn it over to Doug.

Thank you, Owen. Good morning, everybody. Last quarter, I began my comments by saying that we were as busy as we've ever been. We're actually busier today. Owen's comments focused on a string of additional investments that we have moved from pursuit into the active pipeline. We have been communicating these opportunities for a number of quarters and in the case of 100 Causeway Street, which will be an immediate development start, once again, we found another anchor customer that matches with our fundamental strategy of creating great places where tenants can best attract and retain talent. You can't lose track of the labor availability,

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employment picture on our markets. The unemployment rate for people with a degree from a college, BS or BA, is about 2% across the board. Finding an engaged, high-quality workforce is a critical issue for our tenants. And we believe our new and rejuvenated portfolio is a huge advantage. This is our value proposition.

Last October, we had our investor conference in Boston, and we described our development activities, the major capital refreshment that was underway, our vacancy and our leasing exposure in '18 and '19. The conclusion was that the portfolio was in a really good shape with the exception of 1590 53rd Street and 399 Park Avenue, where we had a lot of row to hoe. Those 2 assets, with the combined availability of over 700,000 square feet, have the potential to contribute $55 million of annualized first-year revenue. Remember, we only own 55% of 1590 53rd. We explicitly stated that it was the most important operational challenge we had in front of us in '18, and I'm pleased to report we've made lots of progress. We had 480,000 square feet of availability last October at 399 Park Avenue.

If you picture our stacking plan, moving from the top to the bottom, floors 39 and 38 have been leased, 50,000 square feet; floors 26 and 25 have been leased, 50,000 square feet. We are negotiating a lease for floors 18, 19, 20, 70,000 square feet. The 14th floor has been leased, 40,000 square feet; and we recently signed an LOI and are negotiating a lease for 7, 8, 9 and 10, 250,000 square feet. If my math is correct, that totals 460,000 square feet of leases, 140,000 square feet, which are signed. We have 2 tenants that are competing for the last floor available, the 21st floor, about 23,000 square feet. And just to top off this activity, this week, we expect to sign a 30-year lease commitment for the entirety of the office space at 159 East 53rd Street, 195,326 square feet.

In total, those signed leases and leases in negotiation represent just over $55 million of revenue. The timing of the revenue recognition of the leases is consistent with our previous expectations and significantly weighted to the fourth quarter of 2019. We can control when the leases get signed, we can't control when the tenants build out their space.

In the second quarter, we completed 420,000 square feet of leasing in our Midtown portfolio, that included 300,000 square feet of expansions and extensions at 601 Lex and 599 Lex, and it included 75,000 square feet of what I described at 399.

Overall activity in the Midtown market continues to be strong, and the brokers we work with confirm that the activity we are seeing is consistent with the overall market. The result has been a change in mood and affirming of lease economics. The leasing activity continues to be led by the buyer sector, which continues to enjoy the advantages of that Midtown Manhattan offer.

Base building construction at Dock72 is winding down, and we are building out the amenity space offerings. WeWork has commenced construction of its tenant work with an expected completion by early 2019. We have a few ongoing dialogues, which is a slight improvement from last quarter, but Brooklyn large tenant activity has been light, and tenants have more of a just-in-time perspective. So we don't expect much leasing until the amenity spaces are closer to completed at the end of this year.

Market fundamentals continue to improve in San Francisco. There is no new product for lease in 2018, 2019, 2020 or 2021, now that a single user has leased the entire 755,000 square feet at Park Tower. The next new product to deliver will be a first admission in 2022 or beyond and a 270,000 square-foot rehab expansion has just commenced at 633 Folsom. The large blocks of contiguous available sublet space stemming from tenants that are moving to new construction are disappearing. The Dropbox sublet space, 300,000-plus square feet has been leased, and we believe the Salesforce sublet at Rincon Center and 405 Howard, which are about 200,000 square feet each are also committed. As we move into the back half of '18 and '19, our CBD activities in Embarcadero Center, where we have commenced our major refresh of the public areas and amenities. This quarter, we completed 109,000 square feet of office leasing at EC, including 60,000 square feet of the space made available from Bain consultants' move to Salesforce Tower.

We have 4 noncontiguous full floors at EC 4 and may have the opportunity to put a 60,000 square foot, 3-foot block at the top of EC 4 together next year. Full floor financial or business service demand isn't as robust as the tech-led growth but it is feeling the pressure from the lack of availability, which should lead to very favorable pricing. There has been a reduction in inventory of traditional space as landlords, including Boston Properties, speculatively build more creative office in the existing traditional buildings. There have been significant increases in rents for large block availabilities, geared towards the tech tenants since they been based on new construction economics. Rent growth in older towers, which were traditional buildouts, are also higher but at rates that are still lower than the new construction inventory. It's a great value.

The Silicon Valley has also seen a pickup in activity. There have been over 4 million square feet of deals in the first half of the year from leases in excess of 100,000 square feet, the majority of which has been growing. The existing Class A inventory is being absorbed, the latest megadeal being 1 million square-foot at Moffett Towers in Sunnyvale for buildings that will be delivered in '19. We did another 80,000 square feet of leasing this quarter at our single-story product in Mountain View, where the average rents increased more than 100%, and starting rents are in the mid-50s triple net. We are also responding to a multi-building built-to-suit opportunity at The Station on North First. While we didn't sign another development deal build-to-suit in D.C. this quarter, we did complete 650,000 square feet of leasing. The activity is concentrated in Reston, where we signed 435,000 square feet, and we continue to see strong growing demand from our incumbent tenants. Today, we have 500,000 square feet of additional leases in negotiations.

In the second quarter, we completed a 235,000 square-foot renewal at Democracy Tower, which included the tenant recapturing 76,000 square feet of previously sublet space; we had a cybersecurity company signed a 58,000 square foot lease, including 15,000 square feet of expansion; and an Internet analytics company renewed on 84,000 square feet.

We're working on new leases and renewals with software and web services companies as well as defense contractors and engineering firms. Owen mentioned our second residential project in Reston, which came online this quarter. We've leased about 178 of the 508 units. While at the same time, improving the year-over-year occupancy of the 359-unit Avant project right around the corner, which ended the quarter at 95% occupancy with 1.5% increase in year-to-year rents in the face of trying to lease 508 other units.

In the district, we completed an expansion and an extension with WeWork at Met Square, our 20%, 80% JV with Blackstone. Our other CBD activity was limited in the portfolio. It continues to be a very competitive Class A market, and we actually expect the potential buyer of 1333 New Hampshire to renovate and operate the building at a more moderately priced position. This is not an area of the market in which we at Boston Properties concentrate, hence the decision to exit the asset. 1333 New Hampshire, you'll remember, was the one asset we identified at our investor conference that we were considering for a gut renovation major project, where the only remaining component of the building was going to be its structure. This is obviously a change in plan.

Owen described our expansion into the Santa Monica Business Park. The last few quarters the corporate M&A deals surrounding the HBO, Disney, Fox, Comcast, Hulu changes in ownership have really been weighing on deal activity. Nonetheless, there has been and continues to be a large block activity. The shared office companies have been very active. We're tracking over 0.5 million square feet of transactions that are either completed or underway at 6 individual assets on the west side.

At Colorado Center, we completed 130,000 square feet extension with one of our tenants during the quarter. And last week, we leased the remaining large block of space at Colorado Center, 58,000 square feet to Bird, the scooter company, or the -- I guess, what do they call them, the motorized scooter company, which brings our occupancy there to 98%.

The tightest market in our portfolio continues to be Boston. The percentage leased in our Boston regional office asset is the strongest at 95% in total. We do not have a single vacant floor in our Boston CBD portfolio. When we started the quarter, we had 1 floor left at 888 Boylston. We've signed on 1 lease, expect the second to be executed this week, which will leave us with a whopping 33,000 square feet in the building. You'll note that our leasing percentage is now 88% of The Hub on Causeway, and next quarter you'll see that 100 Causeway is included in our statistics at 70% leased.

Our largest negotiation in the region right now involves the piece of space expiring in 2022. Demand for space in Boston from growing technology tenants is as strong as we have ever seen it. This quarter, the Back Bay had major absorption with 400,000 square-foot expansion by Wayfair, and 100,000 square-foot lease with DraftKings. In addition, Amazon is expanding by taking 430,000 square-foot new building in the seaport, a little less than 440,000 square foot building that Brian is building over at the Hub.

In Cambridge, where we have limited availability, our activity centered at the Proto apartment building. We opened up the Proto 45 days ago in Cambridge, we've leased 82 out of 244 market rate units and 8 of 36 affordable units.

Even as many tenants are attracted to the center cities of Boston and Cambridge, there continues to be significant demand in our Waltham Lexington suburban portfolio. We signed a lease for the entire availability at Reservoir North, 73,000 square feet with a tenant that is upgrading out of 30,000 square feet of B building owned by a local developer, and we are in negotiations with 2 tenants for 70,000 square feet of the remaining 100,000 at 20 CityPoint.

Our active construction projects, including the recent delivery of the Signature, totaled about $3.5 billion. We've signed construction contracts at fixed costs for all of those projects. With the 100 Causeway Street announcement, we have another $1.4 billion of development that is in design and will be bid in the next 12 months. Changes in tariff rates and other headwinds in the construction industry are things we are mindful of when we give our budgets and agree to future fixed leases for these new projects. All of our budgets include both contingencies and cost escalation estimates to manage these types of events. While we have seen an impact on certain components of our projects, our allowances are sized to manage these risks, and they are all a component of the total investing estimates that we provide in our disclosure in our supplemental packages, we have it covered.

I'm going to conclude my remarks with some comments about the same-store statistics for the quarter. Boston and San Francisco had very strong rollups, 44% and 35% net respectively, across their portfolios on about 335,000 square feet. New York City is down on a very small pool, mostly from leases at 599 Lex. And Washington, D.C. is down from the 230,000 square-foot renewal we did at Democracy Tower and Reston, where the initial market rents are usurped by the effect of the 3% annual rent bumps in operating expense escalations that are embedded in the prior 10-year lease. On an earnings basis, the rent's about the same. I'll stop there and turn it over to Mike.

Great. Thanks, Doug. Good morning, everybody. Wow, with all the transactions we completed this quarter, Owen and Doug had a lot of ground to cover. I'm going to try to describe the financial impact and talk about the quarter. So we had a solid second quarter as we exceeded our earnings guidance, and we are raising our full year 2018 estimates. Our second quarter funds from operations came in at $1.58 per share. That's $0.04 per share above the midpoint and $0.02 per share above the high end of our prior guidance range.

Our portfolio exceeded our estimate by $4 million, about $0.02 per share, and it was primarily related to lower operating expenses for the quarter. The majority of these expenses were repair and maintenance items that now will be incurred later this year and will not represent savings to the full year. Our development fee income also exceeded our budget for the quarter by about $0.01 or $1.5 million. The majority of the increase is from earning leasing commissions from our joint venture portfolio that included deals closed at Colorado Center, Metropolitan Square and The Hub on Causeway.

And lastly, our interest expense was slightly lower than our assumption due to higher capitalized interest on our development pipeline and major capital projects. As you can see in our supplemental report, our second quarter same property NOI was down 3.3% on a cash basis compared to the second quarter of 2017. This performance was as we expected, and it was in line with our prior same property guidance, and it's primarily due to the move out at 399 Park Avenue in the third quarter of 2017 that we've discussed. We project our cash same property results will improve in the back half of the year as the income from this space is fully out of the prior year period. And as Doug described, we're well on our way to releasing this space.

As we look at the rest of 2018, we're seeing solid leasing activity in the portfolio, which we expect to result in higher top-line revenues than our prior projections. This includes several renewals in Embarcadero Center and our Mountain View portfolio with increases in rents that will start to flow through our numbers this year. In New York City, we signed a 2-floor expansion at 601 Lexington Avenue for space that expires in the fourth quarter, that we had expected to be vacant. In Reston Town Center, Doug described the renewal and expansion activity we've achieved. And in Santa Monica, we've had similar success completing 130,000 square-foot early renewal with large rent increase and leasing an incremental 60,000 square feet, which is nearly all of our vacancy at Colorado Center.

These deals will start to hit our revenues later this year and primarily impact our straight-line rents due to free rent periods and being early renewals where the cash rent increase comes at natural lease expirations. We've increased our assumptions for straight-line rent in 2018. However, we have not changed our assumptions for 2018 same property NOI growth as we expect we will still end up within the current ranges. So despite giving back most of our second quarter out-performance from deferring operating expenses into the second half of the year, we anticipate our full-year portfolio NOI will be $0.01 per share higher than our previous assumptions from higher revenues.

In our non-same-property portfolio, we closed on the $627 million acquisition of Santa Monica Business Park in July. As Owen described, we completed our capital structure by bringing in CPP as a 45% partner and closing $300 million of mortgage financing at a fixed rate of just over 4%. A portion of the property is subject to a ground lease, which we have accounted for as a capital lease due to our right to purchase the land in 10 years. The net contribution to our 2018 FFO is approximately $0.02 per share, including the impact of the ground lease expense and the mortgage interest expense.

We also closed on the sale of 91 Hartwell Avenue, a fully leased suburban office building located in Lexington Massachusetts. The lost income from selling 91 Hartwell cost us about $1 million of NOI in 2018. We have increased our assumptions for development and management services income in 2018 by $6 million to a new range of $37 million to $42 million for the year.

In addition to exceeding our second quarter budget, we have 2 additional onetime leasing commissions we expect to book later this year. And we also start recognizing fee income from Santa Monica Business Park in the second half of the year. As part of our investment in 3 Hudson Boulevard, we originated an $80 million loan to refinance an existing land loan secured by the site. This is an opportunistic low leverage secured loan that will generate interest income at a positive spread to our corporate debt cost and reduce our overall carrying cost in the investment. We have modified our 2018 net interest assumptions partially to account for the interest income for the loan. Our new range for 2018 net interest expense is $363 million to $375 million, representing a reduction of $3.5 million at the midpoint.

So for the full year 2018, we are raising our guidance range for funds from operations to $6.36 to $6.41 per share, an increase of $0.07 per share at the midpoint. The increase in our guidance is from $0.03 per share of higher projected portfolio NOI, which includes Santa Monica Business Park, $0.03 per share of higher fee income and $0.02 per share from lower net interest expense, offset by the loss of $0.01 per share from the sale of 91 Hartwell Avenue.

Our guidance does not assume any additional acquisitions or dispositions. We are in the market to sell 1333 New Hampshire in Washington, D.C., and if we're successful, we will likely close later this year. The property currently contributes approximately $10 million to our annual FFO. So if we were to close on the sale at the end of the third quarter 2018, it would reduce FFO by less than $0.02 per share and 2019 FFO by about $0.06 per share. Looking out to 2019, we anticipate strong FFO growth with a sizable component of our development pipeline delivering during the year. We still anticipate that all of the revenue from the leasing at Salesforce Tower will be commenced by the end of the third quarter of 2019. Both 145 Broadway and Cambridge and the Hub on Causeway podium developments will deliver in the back half of 2019, and we project incremental growth from the lease up of our 2 residential developments that delivered this year.

Doug described in detail the activity on the leasing front in the portfolio with a significant driver of growth over the next 2 years being the lease up of 399 Park Avenue where we currently have 480,000 square feet of high-value vacancy. We have signed leases or letters of intent on nearly all of this space. As a reminder, the majority of the income will not commence until later in 2019 as this space becomes occupied.

However, we've made great progress in achieving our goal of having all of this space leased in 2018. The projecting growth in our property NOI will be partially offset by higher interest expense in 2019. The capitalized interest for our developments delivering will drop off and although we continue to add new projects to the pipeline, they will be funded primarily with incremental debt, which will offset the capitalized interest related to the development funding.

In addition, 100% of the capitalized interest associated with Salesforce Tower will stop at the end of 2018 even though revenues from the project will not stabilize until third quarter 2019. We will also have interest expense for our new investments including Santa Monica Business Park, 3 Hudson Yards and the dissipated acquisition of Hines' 5% interest in Salesforce Tower. We have started discussions with Hines and expect to close sometime in late 2018 or early 2019. So while we will not be giving detailed 2019 guidance until next quarter, we want to stress that we are delivering on all of the growth opportunities that we have been describing over the past year, and we remain confident in our plan to materially increase our NOI starting in 2019. That completes what we wanted to cover formally. Operator, if you could open up the line for questions, that would be great.

(Operator Instructions) Your first question comes from the line of Manny Korchman with Citi.

I wondered, Doug, you discussed 2 sort of potential big projects in New York. One on Madison and the other in Hudson Yards, both of which you require big preleasing before you go vertical. Can you tell us about the discussions with tenants on both of those projects, maybe the type of tenants and their desire to be at one or the other and how those projects will differ?

Yes, Manny. It's Owen. So first of all, the projects are on a very different time schedule. So the 3 Hudson Boulevard is entitled and ready to go. We're actually working on the foundations to try to improve our speed to market. 343 Madison is in the entitlement process and will not be ready for any kind of new development or tenant conversations for some time. So I think that's the first point and the second point is, we are in the market with 3 Hudson Boulevard. We are -- as I mentioned in my remarks, we certainly are seeking a very significant tenant to launch the project. We have JLL engaged, it's working on our behalf to help us with this. And we're engaged -- we have been engaged and are engaging in those dialogues. John, is there anything more you'd like to say about that? John Powers, who is on the phone. Okay, John?

Yes?

Okay, we didn't hear you.

Sorry. I said the MTA site is in the future, as you said. That has to go through the EULA process, and we have some issues between the city and the state, regarding the taxes that have to get sorted out first. So as you said, that's very much in the future. And we just signed up 3 Hudson Boulevard, and we're very excited with JLL, and we're starting to meet with people now.

Great. And then switching to the West Coast. I think it's news to us that you're buying out the Hines stake in Salesforce Tower. Can you tell us, so is there a contractual feel there? Or why you would start trying to buy that small stake in the building?

Sure. So when we set the deal up originally, we gave Hines the ability to effectively sell their interest upon stabilization and they've indicated that, that's something they would like us to consider doing. So we're entering into a thoughtful dialogue with them about what the value of their interest is. They have a promoted position based upon the performance of the property, and we'll come to some sort of a successful conclusion, hopefully in the next couple of months.

Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets.

Just curious on 3 Hudson, you kind of gave the comp at 10 Hudson. Just curious, where you think your all-in cost and development return comes in 3 Hudson relative to kind of a stabilized value at 10 Hudson?

Okay. I don't know a thing about what the stabilized value is for 10 Hudson, other than what the purchase price was. So it's hard to comment on that. We like -- so we believe that at the appropriate time with the appropriate tenant, we're going to be able to generate a return somewhere near what we've been executing on all of other developments. The amount of space that we have to lease and the amount of speculative risk that we have to take will be, obviously, a key determinant in what goes on there. And we are in a position where, where we are, we believe it will cost somewhere between $1,300 and $1,400 a square foot to build that building based upon the sort of market comps for card cost for construction, for TIs, for interest carry. When we start the building and what the escalation on these costs are going to be will, obviously, impact those numbers. Where rent will be will impact those numbers. So we're not in a position today to say the cost is going to be x dollars per square foot and the return is going to be x percent because there's too many unknowns from a timing perspective.

Okay. And given kind of how far along you guys are on the foundation, what do you think if you guys were to get a significant prelease kind of the delivery time would be from here?

So the schedule that we have right now is somewhere between 36 and 40 months from the construction go date once the foundation is completed to having a tenant physically in the building.

That's helpful. And then just last one for me. Just curious, your updated thoughts here on WeWork and the exposure to kind of coworking in general, as this tenant in particular kind of branches out into other areas of the real estate spectrum. Does that at all change your view on more exposure of this tenant? Or kind of how do you look at them as a tenant versus competitor at this point?

Yes. WeWork's an important customer of Boston Properties. In the supplemental, you'll see they're 14th on the sheet now in terms of their size, they're about 0.9% of income. And we are selectively talking to them about additional stores that they would put in our buildings. As Doug described, we're getting pretty full. So there's less of those opportunities today but we -- for the right building and for the right situation, we would certainly consider expanding our relationship with WeWork.

Your next question comes from the line of John Guinee with Stifel.

Great, okay. Owen, nice quarter, you had mentioned twice conserving public equity capital. Does that mean that you would not issue equity at any price because it just increases the denominator too much and makes it too difficult to move the needle? Or that there is a price that you would rather issue, come in and do -- use JV equity?

Well, John, we are -- given where the stock price is trading, which is we think a very material discount to the value of the underlying asset. And at a rough breakeven yield in the low 5. We don't think that's an attractive market to raise capital at this juncture. And much better way to do it, the best way to do it right now for us is debt financing, because we are creating debt capacity with all the developments that we're delivering and the cost of the debt is much -- certainly much lower than issuing public equity.

Now I think, and the other point I would make, is if we get pushed in terms of -- we don't want to increase the leverage of the company, and if we require more capital, we would certainly continue to access the private equity market for real estate, we just demonstrated with the Santa Monica deal that we have great access to that and have another great capital partner in one of our buildings. So that's the way we're thinking about it. Our public equity is at the bottom of our list in terms of where we want to go to raise capital.

Great, okay. And then Mike LaBelle, your midpoint for 3Q is about $1.62. You implied midpoint for 4Q is about $1.70. Can you talk about how you get from $1.62 to $1.70? And then second, is $1.70 a good floor when I think about quarter-by-quarter for 2019?

One thing to think about is there is some one-time leasing commission and onetime kind of development fees that are in the back half of this year. So I'm not sure that we're going to be able to have the same level of kind of development fee income and leasing commissions next year. So that's something that may not recur with regard to kind of our -- as we move through, our development will continue to kind of add incremental every quarter. So we're getting -- we're gaining occupancy at Salesforce Tower every quarter as tenants kind of move in, occupy their space and then suddenly, we can recognize revenue. Even though we've -- in many of these cases, we've been getting cash from these tenants for months and months and months. We can't recognize the revenue until they finish their space. And then, obviously, we have the 2 residential properties that are coming in as well. The other kind of difference between the third and the fourth quarter is the summer months have higher expenses, in where we operate. So utilities in particular are higher. And so in the fourth quarter, you will see some benefit from that in the fourth quarter.

Okay. And then last question, if I may. You said something very interesting, Owen, you said your land at 2 Hudson -- or 3 Hudson was $360 per FAR, but significantly less on a net rentable square-foot basis. Can you give a quick tutorial on the difference between FAR and net rentable square foot for a building like that?

Yes. John, it's related to the ratio between the rentable square foot -- square feet and the usable square feet and how the ultimate configuration of the building is, and the latter part of that is yet to be determined. But the price per rentable Square foot is lower than $360.

Your next question comes from the line of Alex Goldfarb with Sandler O'Neill.

Just 2 questions. First, Mike LaBelle, as we look to 2019, I just want to get clarification on 2 items. One, it sounded like the sale, while you guys had discussed it before, it now sounds like the sale of 1333 New Hampshire is something new that we want to incorporate into our models for next year. And then second is based on all the leasing that Doug described at 399 and 159 and the fact that you guys I think expect this all to really hit in the fourth quarter of next year. Is that consistent with what you guys have previously laid out at the Investor Day and earlier in the year at NAREIT? Or has some of that timing from revenue recognition been pushed back?

The timing with regard to the New York City leasing is in line with what we have expected and what we've kind of talked about before. We feel like we are meeting exactly what our plan is with regard to the deals that we're working on. And when those deals will come into the revenue picture, the vast majority of this space has been demolished. So it has to be rebuilt and these tenants will take anywhere between 9 and 12 months to kind of get into that space. And some of these tenants obviously had a lease expiry. So they may not be in a tremendous rush. So they sign a lease in the third quarter of 2018 but their lease expiration isn't until the end of 2019. They may be able to build out that space but they may move fairly slowly because they really don't need to be in that space until closer to their lease expiration. So we are right in line with what our expectations have been on that and then -- also in the development pipeline by the way. We provided guidance as to kind of what the development pipeline is going to be delivering in the next couple of years. And we are in line with our expectations in terms of delivering those spaces and getting that rent started. So I don't think there's really any change there.

On 1333, we talked about it before that we would consider selling it. It's now on the market, and we're talking to potential buyers. So I would say it's much more likely that we will be successful in selling that asset than it would have been last quarter. So that is a change. We have not included it in our guidance yet, because we just don't do it until it's done. But that's why I wanted to point it out, because I do think it's more likely than not that, that's going to happen.

Okay, and then the second question is for Ray Ritchey. Ray, just speaking to some brokers down in D.C. recently, mentioned about a pending uptick in government leasing, whether it's possibly something with the FBI but just sort of some pent-up demand from government for leasing. So could you just comment on what you're hearing and seeing in the D.C. market just given that it's been a tough -- it's been a great development market but a tough landlord's market.

Yes, thanks, Alex. I think the FBI is still very much in question about whether they go forward or not. Our president has made it one of his personal agendas and given everything else he faces, I don't think it's #1 on his hit parade to get it started. In terms of GSA leasing in general, when you have something along the lines of 26 million square feet of lease expirations in the next 3 to 4 years, something's got to be done. However, it is still priced to the point that makes new development very, very challenging. So we tend to see, I think, a lot of renewals, a lot of short-term extensions to keep the government in place with no major moves, I think, on the GSA side. But certainly not the downturn we've seen in past cycles.

Your next question comes from the line of Blaine Heck with Wells Fargo.

Doug, great to hear about all activity at 399 and 159. So can you just frame out about how much of that $55 million incremental NOI is under contract versus under negotiation or LOI? And maybe handicap the possibility of any of those leases that aren't signed walking away at this point.

So there's 700,000 square feet, 140,000 square feet of it is signed. I expect that there's another 200,000 square feet that will get signed before Friday. So that will get you to 340,000 square feet or just about half of it. And the other 2 major leases are actively being negotiated and I think our expectation is they're going to get done.

Okay, that's helpful. Mike, same-store NOI guidance implies around 5% in the back half of the year assuming there's not a lot of noise in the same-store pool. So can you just talk about how we should think about that sequentially? Is it going to ramp up through the end of the year? Or kind of jump in the third quarter and stay elevated?

I think it's going to move up but it's mostly going to be in the fourth quarter. The 399 space was not all-out of the portfolio until kind of midway through the third quarter, I guess last year. So that's still going to be in there for a part of next quarter. So I think that it will be better than it was this quarter, but then the fourth quarter will be even better than that to achieve within the range that we provided in our supplemental.

Good, that's helpful. And the last one for me. On 3 Hudson, just coming back to that one, can you guys just give any specifics or range around the pre-leasing hurdle you guys might have there given the supply picture on the west side, and maybe a little more color on how you guys are viewing demand for additional new construction in Manhattan at this point in the cycle.

Let me try to answer this, Owen tried and maybe you didn't find it satisfactory. So I'll try a different tact, which is it's all going to depend on who the tenant is, how long the lease is, what they're doing in the building, where they are in the building and how much they're paying. So there is no number. I can't -- we can't tell you that if a 650,000 square-foot tenant showed up, we would do the deal, and I can't tell you if 1 million square-foot tenant show up, we wouldn't do the deal. So I -- we're just not in a position because we just don't know the facts around the leases, but it's going to be a big number and we are -- I think Owen has described in previous quarters that as we move on in the cycle, we are -- we have toned down our risk tolerance for speculative space. And so that I think -- those are the things that we're judging as we think about what we need to lease the building, but there is no number.

And the only thing I'd add to what Doug said is, in terms of the marketplace, look, the -- it is a thin market to find a tenant of the scale that Doug is describing. There are tenants out there that are interested in new construction that are of scale. The good news is there are not that many options for such a tenant. And we do think that this is one of the absolute best large tenant sites in New York. So we will be accessing that demand as the market evolves in the coming quarters.

Your next question comes from the line of Rob Simone with Evercore ISI.

Just a follow-up on the same-store guidance question from earlier, and I know you guys, obviously, aren't talking about '19 yet. But just kind of like piecing that question together with the fact that most of the cash revenue wasn't going to start hitting your P&L until the fourth quarter of next year. Is there any reason to assume, are there any kind of like one-timers or large leases that could result in whatever you guys print in the fourth quarter at the same-store basis, kind of being -- not being the run rate through the majority of '19?

I think we've done a number of early renewals over the last couple of years, in San Francisco, in Cambridge, in Boston and those were deals that were expiring in '18, '19, '20. We've got some embedded kind of cash same growth that is going to come out of that stuff in addition to the increase that we will get when we refill and get cash started at 399.

Got it. So it could -- it sounds like -- based upon that it sounds like, it could be higher potentially versus Q4? Just trying to read the tea leaves there.

We can't really give guidance right now for what's going to be in 2019. But I do feel like we've got some embedded growth that we've talked about that is coming, and that our AFFO will be better in 2019 than it is in 2018.

Got it. Okay, thanks, Mike. And just a quick follow-up. It sounds like, and you guys have been pretty clear about this. Interest expense being a pretty significant swing factor for next year. And I was just wondering, you mentioned in your prepared remarks that it sounds like there's lower net interest expense for the back half of the year of about $0.02. Is that all attributable to the loan you guys originated on 3 Hudson or is there something else kind of in there that's moving that around?

It's a little bit more capitalized interest, and we had a little bit more cash than we expected. So it's kind of on the margin. But for next year, I think it is important for people to understand that Salesforce Tower, I think right now is 28% in service or something like that. So there's still 72% capitalized interest on $1 billion project. And it goes away on 12/31/18. And again, the income is going to be coming in throughout '19 but there's kind of a mismatch there that -- I'm not sure people fully understand, typically kind of model the capitalized interest goes away as the income goes away and there's kind of match there. But GAAP rules require us to cut it off 12 months from the date that the building is delivered. And that's great if you have a 300,000 square-foot building that you're delivering because you can deliver 300,000 square feet worth of space and build it out within 12 months. But when you're building a 1.4 million square-foot building, even though it's 98% leased, it just takes longer to get all those tenants built. So for these very, very large buildings, there tends to be kind of a mismatch. So I think that's an impact that we have.

And then the other thing is, that we are going to be using -- as you move into '19, we are going to be using debt for nearly all of the new development funding that we do. So that debt is going to be roughly equal to what we are capitalizing. So we're going to kind of lose what we deliver this year. So that does have a pretty significant impact on the interest expense.

The other item that also affects '19, and I mentioned this last quarter, I didn't mention it this quarter, but the accounting change for the leasing cost. So as I mentioned last quarter, that's $0.04 to $0.06 negative to us in '19 versus '18, so that's another thing to just keep in mind.

Your next question comes from the line of Rich Anderson with Mizuho Securities.

Doug, you were -- you mentioned the obvious that you can't control the buildout timing of the space and speaking specifically, you have 399. I'm wondering as you're going through the kind of these -- you just buttoning up this leasing process there, if you're paying attention to the individual circumstances. I'm sure you are, of incoming potential tenants in terms of where they're at now, what their sense of urgency would be to build out the space so that you don't have a situation where you're waiting to recognize revenue because they're taking longer than you had hoped to get into the space.

We are absolutely cognizant of those issues. And in some cases, we hope the tenants are actually in a rush to build out their space, and in fact one of the cases, they are, still going to take them 12-plus months to start their design, get their construction permits, bid it and then build it out. So the timeframes are not going to be significantly different than what we anticipate. But we are clearly cognizant of that, and we know when their lease expirations are, and we know how much "time" they have between the leases.

The other issue is that in certain cases because there are financial services companies for the most part, there's a commissioning of the space that often needs to occur with all their systems because there they can't simply shut down on a Friday and move in on Monday by moving their computers. They actually have to rebuild and basically startup. And so the good news is that will hopefully drive them to be more cognizant of getting in their space a little earlier than they would otherwise.

Do you have some negotiating leverage if they're like literally taking way too long where at some point they just -- you just get to start recognizing revenue if it lags on to too far into the future?

At some point, it's deemed that they're already paying cash rent, and it's deemed that they're not going to be building out anytime soon. We can start to make the argument that we should be able to turn revenue on, because obviously it doesn't make sense to wait until the last day of the lease and suddenly recognize 10 years’ worth of lease in one day. So yes, those situations, they have occurred. There's people that kind of take space protectively, but they don't build it out right away, and we have to make some judgment decisions in those.

Okay. Second question, larger picture. A lot of talk about being in later part of this real estate cycle. And I always get the question, why should I own REITs, if that's the case. And I'm curious how you might respond to that question, and are you feeling some added pressure to button some of these leases up before the music stops? Be it economically or what have you that might influence a slowing down of this current 9-year cycle?

Yes. So on your question, a couple of reactions. I mean, first of all, are we in the ninth-inning of whatever of this economic cycle?

But we're in the ninth year. So not to use a baseball analogy.

We don't -- I don't have a clear crystal ball on this. I even mentioned in my remarks that we don't see a downturn at imminent. We're -- clearly, our instinct is we're closer to the end than the beginning. But there are lots of positive things going on in the market and I think there are some legs. So that's one reaction.

The second is, when I think about, at least our company and to some extent is true with other companies, a lot of the growth that we've been talking about on this call and previous calls is not as economically sensitive as a typical corporation. So a lot of the growth that we're going to experience at the company next year is delivering the Salesforce Tower, which is 98% leased and it's coming on our books. And I'm not suggesting that an economic downturn wouldn't have some impact on our outcomes. But again, a lot of our growth is in developments that are leased in the 80s on a percent basis. And our average lease term for the existing plan is over 7 years. So I think we are, in terms of growth and results, less economically sensitive than a typical corporation.

Also, certainly true of our company and others in our space, we think that the stock is on sale relative to the value of the underlying assets. So that should provide some kind of cushion.

And as I also described earlier, in recognition of this lack of having a clear crystal ball, we're keeping our leverage low. We're not leveraging up the company and taking more risk by doing that. We're keeping the leverage low, which should allow us to weather any storms that might be out there, and frankly, take advantage of anything that comes up. In terms of pressure to do things, I mean look we always feel pressure to have our buildings full and generate income. So I wouldn't say we've accelerated any leasing plans because of some downturn that we see as imminent. Doug and I have described over the last year or so that we have bumped our pre-letting requirements for development. And that is a way that we are expressing that we're later in the cycle and prepared to take a little bit less risk. So I hope that helps you with the conversations you're having.

Your next question comes from the line of John Kim with BMO Capital Markets.

One of your neighbors in San Francisco cited litigation expense this quarter in relation to Millennium Tower. And I didn't hear you guys really talk about this, but are you involved in this case at all and are you experiencing similar costs?

We are absolutely involved in the case. I think the TJPA, 350 Mission, every contractor who's put a shovel in the ground in and around that site over the last 7 or 8 years, every design professional is part of this. We're not going to comment on the litigation other than to say we don't expect any material liability, or we would have disclosed it in our K and our Qs. And our legal expenses are being capitalized into Salesforce Tower at the moment. So that's why you don't see any "disclosure" of what we're spending.

And as far as the resolution or the proposed resolution of fixing the problem, do you foresee any potential business interruption at Salesforce Tower?

All I can tell you is that we don't expect any material liability associated with this.

Okay. At Santa Monica Business Park, did you enter acquiring this asset with CPP in mind as a partner? And if not, can you discuss what demand was like from other potential capital partners for this asset?

Yes. We did decide early in the process that we were -- we thought we should bring in a capital partner in this particular acquisition for the reasons that we've described, which is to preserve our public equity capital. So I think the decision to bring in a partner was made prior to us committing to the deal. And we talked about that on the last call. There was interest certainly by CPP but also by other potential partners in that particular investment, and as I mentioned earlier in my remarks, I think that the private equity capital market for real estate is quite healthy and there are multiple investors that are underfunded in real estate and want more exposure.

My final question is at Signature at Reston. It's now fully placed in service, as far as multifamily, retail. You've done some leasing progress there but how are the effective rents and lease-up period compared to your underwritings just given the amount of decline that you see potential market or multifamily?

Yes. So John, I guess I tried to describe what, I think, is going on by basically saying that the existing apartment building across the street is actually at 95% occupied with an increase in rents year-to-year when the Signature was not open. My implication to that was that we are well in line with our pro forma rents. The leasing is progressing. I would say, if I -- if you put a lie detector on me, I'd say that we would have liked to have been slightly higher leased. But the fact of the matter is that we've just opened up the retail at the base of the building, and we when we started the building and did our pro forma, we didn't anticipate having signed a lease with Lidos for 270,000 square-foot building across the street, where there's a hole in the ground and a little bit of noise in construction activity. So there's little bit of self-inflicted slowdown in lease-up that we had to get through but we're actively moving through it.

I would just add, just like the office market, the residential multifamily in the town centers sell dramatically outperforms the general Northern Virginia market.

Your next question comes from the line of Jamie Feldman with Bank of America Merrill Lynch.

I just want to go back to Ray for a moment. I appreciate your thoughts on the GSA. But can you talk about the defense budget and the increase in spending and what you've seen so far in terms of that translating into office demand? And what you think will happen going forward, given we're getting closer and closer to the end of the fiscal year?

Yes. I think that we've been under a contracting environment on the defense side for so long that even just to stay put on the budget or a modest increase will trigger demand. All these users have gotten down to an efficiency level that I don't think is sustainable.

And we are seeing it in Reston, where we are seeing a lot of our defense contractors or people that are doing business with the government, major engineering companies are coming to us with some growth that is quite a welcome relief to what we've seen over the last 7 or 8 years. So yes, we're very positive about future demand, very little spec space is being built, certainly the Dulles corridor. So as it relates to Reston, we think that there's good signals ahead for increasing demand.

And is the type of building these tenants are looking for different from prior cycles? I know Reston fits in well as the high-amenity type location. Is it different this time or do you think will go back to similar buildings?

Yes. Just as there is demand for talent in all of our markets, there is tremendous demand for talent in the Dulles corridor. So the concept of going to a greenfield office park with no amenities to recruit and retain the best and brightest is not the right way to go in the Dulles corridor. So the same demand, we are just seeing from corporate users, we're seeing from the defense. They want the amenity base we have in Reston Town Center.

Okay. And then just the last question for me. Owen, to your comment about not raising leverage, do you -- are you thinking about more about asset sales, might we see more dilution going forward from larger asset sales than we've seen in the last couple of quarters?

From only non-core assets. As I mentioned, we are having a pretty active year selling non-core assets. So I think we'll exceed the $300 million target. But as I mentioned in my remarks, the selling of our -- most of our core assets involve a significant tax gain and a special dividend and a dilution to FFO.

Your next question comes from the line of Vik Malhotra with Morgan Stanley.

This one's sort of the leasing progress for some of the other assets apart from 399, which you're pretty well on track there. Can you just export maybe $70 million or $80 million of incremental? Can you talk about some of the other properties, 611 Gateway, Colorado Center, Embarcadero? Just what's the sense of timing of lease up for those assets?

Yes. So I will try and reiterate what I said. So I'll start with a simple one. So we've already leased Colorado Center and the revenue on Colorado Center is part of our slight increase for this year. So we are -- we were 98% leased so there is not much to do there. At Embarcadero Center we talked -- I talked about the Bain consulting space, which was the one block that we had when the one tenant from the portfolio left to go to Salesforce Tower. There's a little bit of musical chairs going on because the tenant is taking up spaces and existing and coming tenant but we have on the tenant outside of the project that's looking at that space.

And we have again, we have these 4 floors at Embarcadero Center 4 that we are in 2 cases converting to, what I would refer to as more tech-oriented space creative office and so we think we're going to be very successful in leasing that up, and that construction's going to begin prior to the end of this year, hopefully be done before the end of the first quarter of 2019, which is where our major availability is there.

In Boston, I think I described that we are 95% leased. So there's not a lot to do there. 611 Gateway, we're leasing about 50,000 square feet a year right now. We actually have probably -- we'll probably get to 80,000 square feet in 2018, still leaves about 40,000 or 50,000 square feet of space that's going to be rented at $42 a square-foot plus or minus so, $4 million -- around $1.6 million, so it's not a lot of revenue.

So that I think the rest of the portfolio is doing very well. We do have a few other pieces of high-value space in New York City at the General Motors building. We actually have a lease out on the majority of one of the floors, which we hope to sign in this calendar quarter. And that will likely have a revenue recognition sometime in late 2019 as well. And that's high-revenue space. So the rest of the portfolio is doing very well. If you force me to go back to 2016 and talk about our "revenue bridge," we're within spitting distance of having everything done on that "$160 million" of revenue.

Got it, that's helpful. And then just in New York, I guess you referred to warming up or maybe stabilization in things like TIs et cetera. I'm just sort of wondering, some of your peers have been optimistic about overall midtown rents turning positive and maybe turning upward over the next 6 to 9 months. Do you share that view, anything you could share on your sense of where New York fundamentals would be over the next 6 to 12 months?

I think the house view and I'll let John give you his perspective, is that lease transaction economics in the form of free rent TIs have since stabilized. They're not coming down, per se. And rents are flat and they're largely due to the fact that there continues to be a significant amount of new construction that's occurring, so there are places where tenants can go. The better spaces being leased and the better-built space in those buildings that have gone through a major capital refreshment are -- and there are a bunch of have-nots out there. So we are -- we think it's sort of steady as she goes. There's not going to be significant, if any, rental rates expansion over the next few year. John, any other thoughts?

No. The -- I would say leasing activity is very strong. We had a very, very good first half of the year. But the development has added supply to the market. So that's kept the availability rate from dropping with the leasing activity. And the result of that -- net result of that is what Doug says. It's a pretty flat market, although a very active one.

Your next question comes from the line of Jed Reagan with Green Street Advisors.

Just going back to an earlier question about Santa Monica Business Park. That seems like an attractive addition to the portfolio and it's consistent with the strategy of growing in L.A. Just given that I wonder how you thought through the decision to partner on that asset rather than doing it 100% on your own and kind of maximizing your L.A. presence and why raising capital through that asset made more sense than just selling an incremental non-core asset. I know you touched briefly on that in the last call, but if you just expand on it a little bit?

Yes. When we sell a non-core -- when we sell a core asset, almost all of our core assets have a significant tax gain in them. So that creates a special dividend, which we -- dividend to shareholders, we don't keep the money. So we can't use that capital to make a new acquisition. So it's an extremely inefficient source of capital in that if you look at it that way.

So in the case of Santa Monica, we thought it was a good opportunity to bring in a partner that looked -- we think the yield is attractive. It is lower on a stabilized basis than the developments that we're doing. So that was part of the decision. And we have a very active development pipeline and we want to keep our leverage at the current level, and so we thought it was an appropriate area to raise equity capital in the private market.

How about contrasting it to a non-core asset or a lower growth asset where maybe you've got sort of a stabilized cash flow versus potentially good upside for this asset?

Jed, the other point is, we have a partner in our other deal in Santa Monica as well. We didn't bring that one in, we inherited that because we bought a half interest. So actually both our ideals in Santa Monica are 50-50. So again, I'd kind of go back to the first answer, the first question. To sell an asset to raise money given the tax bases in most of our assets, we can't -- if we did it, even if we get a great price, if we did it then we can't use most -- or lot of the capital, if not most of the capital, to make new investments. That's not a source of funding for this kind of activity.

Right, okay. And there was a recent measure passed in San Francisco, Prop C, that would introduce 3.5% gross receipts tax on office landlords in town. Just curious to get your take on whether you think that measure is going to stand up ultimately? And if so, how much of the tax burden do you think you could pass along to tenants in the long run?

So I'll answer the question on the economics and I'm going to not be able to give you my sense or our sense on whether it will be repealed. It was a 51-49 vote for. It's unclear whether or not that will withstand both legal litigation as well as a revote, if they were to do that. Our leases, we have structured -- allow us to recover these types of increases in the cost associated with what are referred to as taxes. So on the margin, we have vacant space. And so in those cases there may be some revenue that we, depending upon the way all the leases are structured, they would be pushed to the landlord. But the vast majority of this is reimbursable.

And how about when the lease expires, 5 years down the road?

The new lease will have language in it that we believe will allow us to pass along the tax probably in a more precise way.

Okay. And then maybe just last one, I think, and related to that there's been talk of getting new Prop M allocations added back to the queue in San Francisco to account for office buildings that have been converted to resi or other uses, maybe 1.5 million square feet order of magnitude. Do you have any visibility into that process and the chances it goes through and maybe how it could affect your plans?

Sure. Bob, you want to just describe what your understanding is of sort of where that "legislation" maybe?

Yes. Legislation has been submitted by Supervisor Peskin, and we think it will pass. As far as our plans, I don't think it's going to have any material impact because I think the city is going to divvy up the Prop M allocation amongst all of the central SoMa sites.

We have time for one final question. And that question comes from John Guinee with Stifel.

Great. Ray Ritchey, you and I guess Lebron James are active in L.A. now. Now that you have been out there, west of the 405, Beverly Hills Westwood, is it or is it not possible to do new build?

Well, that's of course, Owen could comment on this as well. It's one of the reasons we're picking up sites like the Santa Monica Business Park. The barriers to entry in West L.A. are the strongest of any market we see in the country. And so when we get a chance to acquire 40 some acres in Santa Monica, and we will certainly jump on it. And given the success we've had at Colorado Center where -- almost exactly 2 years ago, we bought it at 65% leased, we're effectively 100% today, just validates both the scarcity of sites and the unbelievable amount of tech demand in that marketplace. So any chance we get to acquire any asset, be it a development site or a new acquisition, we're going to take advantage of it. But the answer to your question specifically John, it's the tightest market in terms of the developable site we've ever seen.

But is it impossible or possible to upzone, et cetera, or is it just -- will we never see another square foot?

The City of Santa Monica, I'd says it's virtually impossible to upzone. OT, do you have any comment on that?

These things are hard to define, John. There is no question that what Ray described is accurate. And it's one of the attractiveness. We think one of the attractive features of the investments that we've made is there's a lot of protection and new supply. But with time, you never know how these things are going to evolve, and how the local community's posture towards these issues will evolve.

I think that concludes all the questions for today, and thank all of you for your interest in Boston Properties.

This concludes today's Boston Properties conference call. Thank you again for attending and have a good day.